Schwarzenegger Adviser Buffett Suggests California Property Taxes Are Too Low

The Wall Street Journal ^ | August 15, 2003 | JOSEPH T. HALLINAN

[Pubbie]

Targeting State's Proposition 13 Is Unlikely Republican Stance

Warren Buffett, the billionaire financial adviser to Arnold Schwarzenegger's campaign for California governor, strongly suggested in an interview that the state's property taxes need to be higher.

Mr. Buffett, the chairman of Berkshire Hathaway Inc., took on California's famous Proposition 13, which has limited property taxes there since 1978. As an example, he pointed out the difference between his own property-tax bills for homes he owns in California and Nebraska.

His home in Omaha, he said, is valued at roughly $500,000. His current yearly property tax bill on that home: $14,401.

In California, he owns a Laguna Beach home valued at $4 million, or eight times as much. The annual property taxes on that home are just $2,264 -- a fraction of what he pays in Omaha.

More to the point, said Mr. Buffett, the taxes on his Omaha home rose $1,920 this year, compared with $23 on the Laguna Beach home. Mr. Buffett attributed the scant jump in California to the restrictions of Proposition 13, which generally limits property-tax increases to 2% a year, no matter how much the value of a property appreciates.

Mr. Buffett stopped short of saying he would urge Mr. Schwarzenegger to seek a reversal of Proposition 13 to increase property taxes -- a move that would almost certainly be attacked by many of Mr. Schwarzenegger's fellow Republicans. But he left little doubt that that is where he is leaning.

"This property-tax illustration, that tells you, you can draw certain conclusions from that," said Mr. Buffett. Noting that tax assessments also vary widely, he said of the tax system, "In effect, it makes no sense."

"But you've got to look at everything," he added. "I took the job yesterday. And it's going to be his [Schwarzenegger's] policies. Any advice I give is going to be to him."

The state has been roiled by financial troubles tied to the economic downturn and the recent state energy crisis, factors fueling the effort to recall Gov. Gray Davis. Standard & Poor's Corp. has downgraded California bonds to a triple-B rating, the worst in the nation and two notches above junk-bond status.

Proposition 13 limits on property taxes aren't directly responsible for California's current fiscal problems, which had the state facing a deficit of $38 billion for the fiscal year that started July 1. But in general, the limitations on property taxes have forced state government to rely on other taxes, such as the personal income tax, and to engage in complicated maneuvers to reallocate the state's revenue and help entities that faced funding gaps, especially schools. Even with those constraints, state spending grew faster than inflation in the 1990s, but then leveled off and is down this year.

Mr. Schwarzenegger, like other candidates, has vowed to improve the state's fiscal picture. But suggestions that tax increases could be an answer could represent a problem for Republicans and the Bush White House, who have pursued tax cuts as the best way to improve the economy overall. Democrats are sure to leap at the contradiction, and the Buffett comments may likely to deepen the biggest fear of many national Republicans: that the moderate views of Mr. Schwarzenegger, for all his appeal as a candidate, could spark infighting within the party.

Sean Walsh, a spokesman for the campaign, said, "The proposals and courses [Mr. Schwarzenegger] chooses will be his own." The campaign announced late Thursday that Mr. Buffet and former Secretary of State George P. Shultz will co-head an "Economic Recovery Council" to advise the campaign, and he said that Mr. Buffet's voice would be one among its members. "The breadth of economic and financial views will be presented to Arnold," Mr. Walsh said.

In the interview, Mr. Buffett also said people approached Berkshire Hathaway and other financial firms a few months ago on behalf of the state of California, seeking to secure buyers for the state's bonds if necessary. "California was looking in the financial market for, in effect, a 'put,' or guarantee, by financial institutions that they would be able to come to market with bonds about nine months hence," said Mr. Buffett.

A spokesman for the California Treasurer said the department had "no knowledge of any state representative approaching Mr. Buffett." Steve Peace, California's director of finance, said investment bankers might have initiated such a discussion, but not with any official authorization by the state of California. He said the bond issue most likely involved -- a $10.7 billion limited sales tax bond -- has not yet been issued.

Mr. Buffett said that in the discussion with Berkshire Hathaway, the state was willing to pay 0.75 percentage point, or about $80 million, to firms such as Berkshire if they would agree to buy between $10 billion and $11 billion in bonds.

"That's a lot of money to pay for a put," said Mr. Buffett. "It's a couple bucks for every citizen of California." Just a year earlier, said Mr. Buffett, the fee for such a put was just 0.18 percentage point. "I thought about doing it," he said, but decided against it. Berkshire, he said, owns no California bonds.

Mr. Buffett's comments come a day after he startled many political observers by jumping into politics in the nation's biggest state, especially on the side of a Republican candidate. He is usually associated with Democratic causes. "I don't worry about that," he said. "I vote for far more Democrats than I vote for Republicans. But I vote for plenty of Republicans."

Among Mr. Schwarzenegger's competitors for the governor's seat is a longtime acquaintance of Mr. Buffett, former baseball commissioner Peter V. Ueberroth, who sits on the board of the Coca-Cola Co. with Mr. Buffett. Mr. Buffett said he hadn't known Mr. Ueberroth would be a candidate. Referring to Mr. Ueberroth and former Los Angeles Mayor Richard Riordan, another candidate, he said, "Peter is very able. Dick Riordan is very able. But Arnold, he's a very smart fellow. He has brains and muscle. Some of us have neither."

Through Berkshire, in which he controls about a third of the shares, Mr. Buffett has billions of dollars invested in the state of California. Those holdings include about $2.67 billion in stock of San Francisco based Wells Fargo & Co., along with other businesses, such as See's Candies and MidAmerican Energy Holdings Co., the nation's third-largest owner of natural gas pipelines. MidAmerican does substantial business in California. Its Kern River Gas Transmission Co. operates a 926-mile pipeline from Wyoming to the San Joaquin Valley near Bakersfield, Calif.

"The truth is California has got very serious financial problems," Mr. Buffett said. "It's an economy that's the size of France and there's no way the U.S. is going to have a healthy economy if California continues to have the problems it has . . . I've got a selfish interest in this country doing well, no doubt about that."

Mr. Buffett said his preliminary assessment of California showed that the state's budget had depended on billions of dollars collected in capital gains taxes, much of it generated by the bull market of the late 1990s. "In effect," he said, "they set their financial planning based on a financial bubble." Now that those gains are gone, California's budget must be balanced by money from elsewhere.

[Pubbie]

Guard yourselves - The WhoreAcle of Omaha is coming for YOUR bank accounts! :(

[ElkGroveDan]

Hey SHHHH!!!! No one wants to hear this. Cover your ears everyone, turn off Rush and look the other way. We won't hear anything to burst our movie-star bubble.

[SolutionsOnly]

That should sober up some Republicans! Hope so, anyways!

[Austin Willard Wright]

No....they will continue to rationalize....rationalize....rationalize. It will be amusing to see how they try to do it, however.

[spokeshave]

Looks like I need to re-engineer my tag line......

[I still care]

"In California, he owns a Laguna Beach home valued at $4 million, or eight times as much. The annual property taxes on that home are just $2,264 -- a fraction of what he pays in Omaha"

I freely admit I find that amazing. I would pay half that in Florida on a $100,000 house.

By the way, if he is so concerned about the school system, I think instead of raising everyone's taxes, he should donate that house to the school system.

People need to understand that taxes are slavery.

[DManA]

"I vote for far more Democrats than I vote for Republicans. But I vote for plenty of Republicans."

How may places and how often does this guy vote? Is he confusing voting with giving money?

[mallardx]

Arnold, NO

McClintock, YES

[evolved_rage]

I didn't think Florida had an income tax. California is 9.3% for > $38K.

Nebraska is 6.84 for > $26k.

[ProudGOP]

This is a duplicate thread.

On the other thread, a poster said its because he has had the house for so long it has appreciated. Prop 13 limits how much the tax can be increased.

If he bought the house today, he would be paying 40,000 or so.

I am paraphrasing another poster but it made sense to me.

[Henchster]

There's no way he pays that little on a $4 million house here in Cal. It's more like $40,000.+

I think the doofus looked at his MONTHLY tax bill (escrow) on his Cal home, and compared it to his ANNUAL bill on the house in Omaha.

[I still care]

We don't. I'm not complaining.

In NY I paid $6100 on a $250,000 house, and there was a NY state income tax too. It was way too high to stay there, that is why I came to FL.

[Rodney King]

The fact that taxes are astronomical in Nebraska doesn't mean that they are too low in California. 14K for a 500K house is a lot!! In OK, taxes are about $1,200 on a 130K house.

[Callahan]

Replacing high income taxes with higher property taxes makes sense to me. I always prefer consumption-based taxation. Don't like it, choose a less expensive home. The problem would be if Arnie jacked up the property tax rate without cutting anything else

[novacation]

Arnold better put a cork in that one or he will lose. I pay $4,700 a year in property taxes on a house I bought last year. That is too much. Arnold needs to kill that comment quickly. No more taxes! If someone buys a $4,000,000 house now the taxes will be over $50,000 a year.If Buffet want so pay more he can. Liberel puke alert.

[Dane]

No....they will continue to rationalize....rationalize....rationalize. It will be amusing to see how they try to do it, however.

Huh? Although I am not a California resident, I questioned Arnold bringing Buffett on to his team.

JMO, but Arnold made a major mistake, but the only other realistic contender is Bustamante.

It's a political minefield out there, and California is the biggest of all, for candidates and voters.

[MineralMan]

Wasn't someone saying that Ahnuld was a Republican? Sure doesn't sound like it to me.

[NormsRevenge]

It won't be the last edit you have to make on your tagline, I reckun. LOL ;-)

[I still care]

That sounds right. We have the same thing in FL, where it is limited how much your taxes can climb when you live in your house.

[Reeses]

I wonder why Democrats like property taxes. Like sales taxes they are not progressive and tax lower income people at a much higher percentage of their discretionary income. Real estate is in a valuation bubble that is about to burst as interest rates go higher. That's a double whammy if the socialists raise property taxes as property value goes down.

[John Lenin]

Strike one for Arnie !

[evolved_rage]

More than likely he bought a 600 square foot shack back in the 70's, and has upgraded the hell out of it.

[Callahan]

Buffet a doofus? I don't agree with his liberal leanings, but the guy knows how to make money.

[Lijahsbubbe]

So what. C'mon, vote for Arnold. He's cool! It'll be fun, we can be a cool party! ;^)

[Chesterbelloc]

That is correct. Property taxes are set at roughly 1% of the price that you pay for your home. When a house changes ownership the tax amount is reset to the new level.

[Callahan]

That's what I'm saying. Republicans should be for sales taxes and property taxes--as a way to reduce the income tax.
They hit you for what you consume, not what you produce--big difference.

[BlessedByLiberty]

Dear Mr. Buffet:

Please feel free to donate millions, or billions to the coffers of the federal government or any state government you chose.

Just keep your hand out of the pockets of mine.

Why trade Gray for another pick pocket Mr. Schwarztnegger?

[cogitator]

Interesting. In neighboring Virginia (I live in Maryland), the maximum tax bracket starts at $17,000 family annual income, which is below the official U.S. poverty level. Virginia has had some trouble in the past couple of years balancing its budget (partly because they repealed a hated car-tax when the budget surplus during the boom 90's could pay for it), and they're still trying to figure out if they can change the tax code without ticking off too many citizens.

[truth_seeker]

This analyst concludes that property taxes are out of control in Nebraska. Voters in Nebraska need to obtain the equivalent, of Prop. 13.

The reason California voters enacted Prop. 13 was so property taxes wouldn't reach the levels of Nebraska. Does Nebraska have income and sales taxes, as high as California?

I think Buffetis a bad idea, for Arnold. George Schultz is a good guy. He has government experience credentials. Buffet is stirring up a bunch of crap.

[Ronaldus Magnus Reagan]

In the Philadelphia, Pa. suburbs, you can assume that property taxes will be approx. 1.5% to 2% of the assessed value of the house PER YEAR. So, a $500,000 house will have about $8,000 in property taxes per year. Pa. state income tax rate is 3.1% (it's a flat tax rate). Compared to other states, that sounds like a pretty good deal.

[Burlem]

Mr. Buffett said his preliminary assessment of California showed that the state's budget had depended on billions of dollars collected in capital gains taxes, much of it generated by the bull market of the late 1990s. "In effect," he said, "they set their financial planning based on a financial bubble." Now that those gains are gone, California's budget must be balanced by money from elsewhere.


******Sure wouldn't want to cut anything would you?
These folks scare the shi- out of me.
If Arnold is elected we are in deep trouble, charisma, be damned. Clinton had charisma too, didn't he?

[Dane]

Buffet a doofus? I don't agree with his liberal leanings, but the guy knows how to make money

Yes Buffet does know how to make money and is a Wall Street darling, but it seems he lives in his own bubble, IMO.

Why Buffet's opposition to end of the estate/death tax? Because of his own personal opinion. Buffet does not believe in leaving his progeny his estate. That is fine, in his will let him leave his whole estate to the Federal government, nothing wrong with that, but a person shouldn't mandate that by government fiat. Tell that to small business people or family farmers, who get killed by the death tax.

Again JMO, but Buffett is a very selfish and meglomanianic person. Now wonder he likes Hillary.

[William McKinley]

Two reasons:

1) They can be raised without passing laws. Once in place, you just 'reappraise' the properties, and voila, you have a tax increase without having to tell the voters you are raising their rates.

2) They turn property ownership into property rental. You don't own your land- you rent it from the government. Perhaps not legally, but if you don't pay your property tax they will take the land so in effect it is the case. Democrats HATE private property.

[Bob]

Strike one for Arnie !

Strike one??

I guess you must have missed his 1) pro-abortion, 2) pro-gay-rights, 3) pro-gun-control, and 4) pro-big-government-programs positions.

[johnb838]

But in general, the limitations on property taxes have forced state government to rely on other taxes, such as the personal income tax, and to engage in complicated maneuvers to reallocate the state's revenue and help entities that faced funding gaps, especially schools

And they say this like its a good thing. If all Ahnold is planning to do is to raise taxes to cover the deficit, why not just leave Davis in there? He can raise taxes and spending just as well as Ahnuld can.

OTOH -- if Davis is in there the pubbies will fight. If Ahnold is in there they'll roll over and surrender, just like the pubs in Washington. I might just be about to throw my support to Davis.

[ElkGroveDan]

That's what I'm saying. Republicans should be for sales taxes and property taxes--as a way to reduce the income tax. They hit you for what you consume, not what you produce--big difference.

You have to understand the origins of Prop 13. Property values were soaring in the 70s but income wasn't. The tax assesors were going around a couple times a year re-assesing homes and jacking up property taxes. Porperty taxes soared out of control as government's insatiable appetite gobbled up everything these people owned. Retired people on fixed incomes found themselves thrown out on the streets because of assesments on the potential value of homes that they never planned on selling.

[SupplySider]

Please feel free to donate millions, or billions to the coffers of the federal government or any state government you chose.

That hits the nail on the head. His pious schemes for other people's money are fine and dandy, it's just too bad he wants to enforce them at government gun point.

[coloradan]

Is the job of a governor's advisor to tell the governor how to make money? (Is the purpose of a government to extract as much wealth out of its subjects as possible?)

[buwaya]

I don't know why they like property taxes either.

Its hard to tell whether CA property tax increases or decreases property prices.

The California property tax actually adds a brake to the valuation bubble as it penalizes new home buyers, as they pay 1.1-1.2% on the current inflated value. For instance, I pay $ 3000 a year on my house purchased in 1996, but my neighbors who bought the same this year would be paying
$ 6000, and the old folks down the street who have owned theirs since 1961 could be paying maybe $ 300-400.

On the other hand, it is a disincentive for people to sell and move, as their living expenses will likely go up greatly.

Whats certain is that it is unfair to new homeowners.

The overall California state and local tax burden is above average for the US, but as a disincentive to business it is less so than the high cost of living, driven mainly by high property and rental costs.

I would be in favor of rationalization of the property tax situation, combined with a lowering of the income tax and a reduction of the obstacles to new housing development (the real culprit). More property tax and less income tax would even out state finances.

[RS]

""In California, he owns a Laguna Beach home valued at $4 million, or eight times as much. The annual property taxes on that home are just $2,264 -- a fraction of what he pays in Omaha"

If his home in CA is not his primary residence he might find a revised bill in his mailbox

[RightWhale]

There is one sure way to lose an election. Warren Buffet has named it.

[Uncle Hal]

If Warren pays taxes of $14,401 on a $500,000 house in Omaha and $2,264 of taxes on a $4 million house in CA. then Warren should lobby for property tax cuts in Nebraska. If Prop. 13 was in effect today and was administrated the same as when the law was changed, Warrens tax on his beach pad would be in the area of $100,000. Warren obviously bought his house many, many tears ago probably paying around $100,000 or maybe a little more. He thus benefited from the great appreciation of house prices in CA. Warren can afford to pay big taxes. But if he was the average retired Joe living on a pension he would have probably been forced out of his long time residence because he could not afford the taxes to keep it. This is exactly why Prop.13 was passed, so that the average person could stay in his long time residence without the fear of being forced out by high property taxes. Mr. Buffett should go back and review his CA. history. Prop 13 enabled home owners to fix their housing costs with some certainly.

[buwaya]

As far as I know all the US has property taxes.

There has to be some sort of tax.

[novacation]

CA propery tax is 1.25%, but a bunch of other crap gets tacked on from bonds and other fees. The top state income tax is over 10%. Sales tax in 7.something. You know davis and gang just tripled the rate to register a car.It ain't cheap to live in California if you work. Arnold better dump buffet. The first thing out of his mouth is overturn prop 13 and raise taxes? There would be a revolt and it wouldn't surprise me if there was violence.

[My2Cents]

My biggest concern about McClintock is that while he's not part of the problem in Sacramento, he's part of the fraternity. I think the best thing to do is to bring someone in who's truly an outsider. If not Arnold, then Simon is the more likely alternative. McClintock would make a great Director of Finance in whomever's Administration.

[Enterprise]

Well, I don't see what the problem here is. If Buffett really wants to pay his fair share of property taxes in California he should do the following:

1. Sell his house to a trusted friend for 4 million dollars. The State will get a 3% tax on the sale, and the house will be revalued and taxed at the higher level.

2. Have the trusted friend sell the house back to him for 4 million dollars. That way, he gets to pay another 3% tax on the sale of the house, he will own the house again, and he gets to pay a much higher property tax.

3. Or, he can do as others suggest. Send the Government more money, leave my property taxes alone, and JUST STFU!!

[leprechaun9]

Buffet should be asked how much tax should be paid on his CA property, AND THEN PAY IT! Put his level of charity to the test!

Is there a law prohibiting overpayment of property taxes?

[Ernest_at_the_Beach]

calgov2002:

Gray Must Pay
Cruz Must Lose

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